'Spend more on health, education'

The Asian Development Bank has prescribed biggest investment on health and education in Asian developing countries to close their equality and income gap spending .

The widening of the income gap over the past 10 years requires more spending on soft infrastructure and more support for inclusive growth.

According to the ADB's Asian Development Outlook, during the 1990s and 2000s, more than 80 per cent of the region's population lived in countries with a Gini coefficient that got worse due to globalisation, plus advances in technology and market reforms, which have extensively exacerbated inequality.

The Gini index measures the extent to which the distribution of income within an economy deviates from a perfectly equal distribution. A Gini coefficient of 0 represents a perfect equality in society.

According to the World Bank, Thailand's Gini coefficient decreased by 14.9 per cent from 45.3 in 1990 to 39.4 in 2010, but it is still higher than South Korea (31.3 in 2007), Japan (38.1 in 2005), Laos (36.7 in 2008), Vietnam (35.57 in 2008) and Cambodia (36 in 2009). However, Malaysia at 46.2 in 2009 and Singapore at 48.1 in 2008 scored worse ratings.

Juzhong Zhuang, deputy chief economist of the ADB, said last week that public policy can and should play a greater role in support of inclusive growth in Asia. Policymakers in Asia should involve the targets for lowering inequality in policies and budget-making to ensure that the benefits from economic growth are equally spread.

From international experience, public spending can reduce income inequality through investment in healthcare and education, which can broaden access to these vital services for the poor and also provide them with an "equal playing field".

Education and health services directly improve the wellbeing of the poor, as policy simulation suggest that permanently raising public spending on education by 1 per cent of GDP can lower the Gini coefficient by 1.1 percentage point within a decade. Doing the same for healthcare will lower it by 0.3 percentage point.

However, most policymakers in developing Asia have concentrated on fiscal policy to support growth. By doing so, they have fallen behind other regions in the effort to lower inequality and support a more equal income distribution.

Developing Asia spends on average 2.9 per cent of GDP on education, which is lower than 5.3 per cent in advanced economies and 5.5 per cent in Latin America.

Developing Asia is spending only 2.4 per cent on healthcare, in stark contrast to 8.1 per cent in the advanced economies and 3.9 per cent in Latin America.

For social protection, developing Asia is spending 6.1 per cent of GDP, while Latin America is spending double that at 12 per cent and the difference is even starker in advanced economies at 20 per cent.

Making the growth process more inclusive would require an expansion of public spending, but expanding public expenditure without adequate revenues could be unsustainable.

During the 2000s, tax revenue to GDP averaged 17.8 per cent in developing Asia, which is below 21.8 per cent in Latin America, 31.9 per cent in the Organisation for Economic Cooperation and Development and 28.6 per cent worldwide. This shows that the region must improve its mobilisation of fiscal resources.

Laxmon Attapich, senior country economist, said that to increase public income to support public spending in education and healthcare, Thailand should expand and strengthen its fiscal resource base by broadening the base for personal income tax, enlarging corrective taxes, such as on pollution, and non-tax revenues while introducing a progressive tax on property, capital gains and inheritance.

Thai policymakers should be more careful when making policies that are financially unsustainable such as the rice pledging and first-car schemes. The money spent on such badly designed policies could go to better use in investing in soft infrastructure.

"A policy needs to be based on solid fiscal data and analysis before it is implemented," he said.

According to the Asian Development Outlook, extending public infrastructure can magnify the inclusive impact of public spending on education and health since spending 1 per cent of GDP on infrastructure can boost growth by an estimated 1.3 percentage point.

Making infrastructure affordable and accessible also allows the poor to take better advantage of the economic opportunities that come with improved education and health.